The complementary/substitution effects of post-privatization corporate governance mechanisms on firm performance in selected MENA countries

Abstract

Purpose The purpose of this paper is to expand understanding of the determinants of performance in newly privatized firms by empirically examining the interaction effect of internal corporate governance and Big Four auditors in Middle Eastern and North African countries. Specifically, the paper contributes to the existing literature by identifying whether there is a substitute or complementary relation between internal corporate governance mechanisms and Big Four auditors. Design/methodology/approach A data set of 88 NPFs of MENA countries over the period 1987-2010 is used. The methodology is based on two-stage least squares regression analysis. Findings Results show that government ownership and the proportion of outside directors can substitute for Big Four auditors. However, foreign ownership and the CEO duality reinforce each other to improve performance of NPFs. Overall, these findings suggest that in the presence of agency problems within privatization process, different combinations of internal corporate governance and Big Four auditors can serve as a monitoring response in NPFs and should yield a superior performance. Practical implications This study gives insights to policy makers’ managers and regulators who are interested in investing in MENA region. The authors argue that information regarding who is auditing the firm is very value relevant for investors investing in the MENA region. Firms with Big Four auditor as external auditors are likely to disclose better information than those that are audited by non-Big Four auditors. Originality/value This paper extends the understanding of the determinants of the post-privatization performance in MENA region. It fills the privatization literature void by introducing Big Four auditors as an external governance mechanism. To the authors’ knowledge, the authors’ work is the first study that investigates whether Big Four auditors play an important role and interact with internal corporate governance mechanisms to address the dominant/minority shareholders post-privatization agency problems.

Corporate boards, shareholding structures and voluntary disclosure in emerging MENA economies

“…The findings in Model 2 illustrate that the association between DSH 2 or GSH 2 and GINDEX is statistically insignificant, supporting the absence of a curvilinear relationship between these variables and voluntary CG disclosure. On the other hand, our findings show that FSH 2 has a positive and significant impact on GINDEX, suggesting that family shareholdings become more entrenched at higher levels of ownership, which is consistent with theoretical suggestions that high family ownership increases the information asymmetry problem between controlling and minority shareholders, therefore firms may increase the extent of corporate disclosure to reduce agency costs between controlling and minority shareholders (Chau and Gray, 2010;Hassoun and Aloui, 2017).…”

“…Second, most companies in MENA countries are either state-owned or family-held firms with concentrated shareholding structures. As such, they differ from companies in developed countries, which by contrast, tend to depend extensively on external finance from stock markets (Omran et al , 2008; Piesse et al , 2012; Aljifri et al , 2014; Albitar, 2015; Al-Janadi et al , 2016; Elghuweel et al , 2017; Hassoun and Aloui, 2017). Third, the legal system and corporate laws tend to provide limited protection to minority shareholders compared with those operating in developed economies (Omran et al , 2008).…”

“…This helps in explaining why most listed companies in these economies do not often adhere to the disclosure and transparency requirements that have been imposed by stock market authorities (Piesse et al , 2012; Samaha et al , 2012; Aljifri et al , 2014; Albitar, 2015; Al-Janadi et al , 2016; Md Zaini et al , 2018). Consequently, minority shareholders’ rights are limited because of the inefficiency in the information environment that encourages insiders and majority shareholders to gain from private information (Dimitropoulos and Asterious, 2010; Piesse et al , 2012; Al-Janadi et al , 2016; Hassoun and Aloui, 2017).…”

“…For other MENA countries, active capital markets are considered essential for the pursuance of successful economic and financial reforms, which began in the early 1990s. These reforms depend on large-scale privatisation programmes involving the divestiture of large public sector companies (Piesse et al , 2012; Hassoun and Aloui, 2017). Consequently, most MENA countries have thus engaged in economic and financial reforms (such as developing national stock exchanges, issuing national governance codes and improving business-related laws and regulations) with the aim of encouraging domestic savings and attracting foreign investments (Al-Shammari and Al-Sultan, 2010; Ebaid, 2013; Aljifri et al , 2014; Albitar, 2015; Al-Janadi et al , 2016; Elghuweel et al , 2017; Elkelish, 2017; Hassoun and Aloui, 2017; Khalil and Maghraby, 2017; Hessayri and Saihi, 2018).…”

“…Implementation of such CG codes may also help reduce corporate financial risk and thereby improve corporate performance in these countries (Gompers et al , 2003; Beiner et al , 2006; Haniffa and Hudaib, 2006; Henry, 2008; Ntim and Soobaroyen, 2013; Ebaid, 2013; Aljifri et al , 2014; Albitar, 2015). In general, the recent adoption of CG codes in emerging MENA economies tends to seek to complement other economic and financial reforms that they have often pursued and are aimed at encouraging domestic savings, as well as attracting foreign direct investments (Lagoarde-Segot and Lucey, 2008; Aljifri et al , 2014; Al-Janadi et al , 2016; Hassoun and Aloui, 2017; Hessayri and Saihi, 2018).…”